Per Pay Period Comp, Safe Harbor Match, and True-up

[401king]

Here's the scenario:

Company is on a per-pay period compensation computation period; safe harbor match is funded on a per-payroll basis. Currently there is no true-up provision.

One partner decided to defer 100% of the first few paychecks to max out 2009 contributions early, so their match calculation was for the respective payrolls.

Example:

1/15 payroll - Comp: $11,000; deferral amount: $11,000; Safe harbor match: $440

1/30 payroll - Comp: $11,000; deferral amount: $11,000; Safe harbor match: $440

So as of 1/30, the participant has maxed-out ($22,000) and received a total match of $880. Because their is no true-up, this person is not entitled to any additional match.

So, if we amend the plan mid-year to allow a true-up, can we look at the annual numbers, or are we stuck looking at in on the micro-level of truing up each pay period?

In short, would the plan run into any issues getting this partner the full $9800 match (4% * 245,000) or is he stuck with the $880 (assuming we amend to allow annual true-ups)?

[Kevin C]

Sorry, but you can't amend the safe harbor match provisions mid-year.

1.401(k)-3(e) Plan year requirement

(1) General rule. --Except as provided in this paragraph (e) or in paragraph (f) of this section, a plan will fail to satisfy the requirements of sections 401(k)(12), 401(k)(13), and this section unless plan provisions that satisfy the rules of this section are adopted before the first day of the plan year and remain in effect for an entire 12-month plan year. In addition, except as provided in paragraph (g) of this section, a plan which includes provisions that satisfy the rules of this section will not satisfy the requirements of § 1.401(k)-1(b) if it is amended to change such provisions for that plan year. Moreover, if, as described under paragraph (h)(4) of this section, safe harbor matching or nonelective contributions will be made to another plan for a plan year, provisions under that other plan specifying that the safe harbor contributions will be made and providing that the contributions will be QNECs or QMACs must also be adopted before the first day of that plan year.

[K2retire]

The reason you can't amend mid-year is to prevent precisely the type of manipulation by HCEs that you are trying to accomplish.

[austin3515]

I think calling it a manipulation is unfiar - let's face, the owner got screwed here. Let's also remember that the other participants can only BENEFIT from this amendment.

Personally, I was floored when I learned you couldn't make this change...

[K2retire]

He knew (or should have known) what the rules were before he decided to make his deferrals up front. It was likely set up to avoid having to true up staff match and now he's hurt himself by not following his own rules.

Frankly, I was surprised when I learned that it was permissible to not require true ups. But if you're going to play that game, it must apply to everyone.

[401king]

Trust me, this is another case of a 401k provider not explaining any piece of the puzzle. Granted, the trustee should have done his own research and asked questions, but I can assure you he was not aware when frontloading the deferrals.

Anyway, thank you all very much for the opinions.

[John Feldt ERPA CPC QPA]

"One partner decided to defer"

Is the person truly a partner, as in a partnership or LLP?

If so, then do we know what percentage of earned income that partner has at the time of the deferral, or do we find out at the end of the year when earned income is calculated? The question is perhaps: what is the "pay period" for a partner?

[austin3515]

Great question... If he's an "earned income" person then you automatically get a true up since all income is deemed earned on the last day of the Plan Year. Of course, based on the fact pattern, it seems unlikely, considering the OP is the 401king

[John Feldt ERPA CPC QPA]

Maybe the OP is just 401k-ing around... can we actually post that kind of language here?